Manhattan Investment Sales Market Prognosis

As I discussed last week, the activity in the investment sales market in New York City continues at a torrid pace with dollar volume approaching the $62 billion record established in 2007 and the number of properties sold on pace to exceed 5,200, which would be an all-time record. Demand drivers are in full swing with high-net-worth individuals, New York families, institutional capital and first-time buyers from around the country and globe aggressively chasing after New York City assets.

Foreign capital has been a tremendous driver of this demand and we are seeing more and more new foreign investors coming into the marketplace every day. Historically, this foreign capital has been interested only in Manhattan assets but now is increasingly looking at opportunities in the outer boroughs. As their focus is still primarily on Manhattan, this week we will take a look at how the core Manhattan investment sales market is performing so far this year and what its prognosis is for the future.

In the third quarter of the year, there was $8.2 billion of investment sales activity in the Manhattan submarket (defined as south of 96th Street on the East Side and south of 110th Street on the West Side). This total was down from the $10.6 billion that occurred a quarter prior. However, through the first three quarters of the year, there was $28.7 billion of investment sales activity in Manhattan, which puts the market on pace for $38.3 billion, if annualized. If realized, this total would be one-third larger than the same $28.7 billion that occurred in all of 2013. It would, however, remain 27 percent below Manhattan’s all-time 2007 record of $52.5 billion.

There are many very large transactions, which have been announced, but did not close by the end of the third quarter, and based on this additional activity we expect there will be a significant rise in the dollar volume of sales in the last quarter of the year. While we may not eclipse the $52.5 billion that occurred in 2007, we believe we will come close to that number.

With regard to the number of properties sold, the Manhattan submarket saw 208 properties trade hands in July, August and September. This figure was down from the 259 properties that sold in April, May and June. Overall, Manhattan submarket has seen 710 properties sold through the first three quarters of 2014, on pace for 947 for the year, if annualized. If realized, this total would be 17 percent higher than the 807 properties that sold last year. The figure would, however, be 21 percent below the 1,200 properties that traded in 2012.

We believe that the slowdown in the number of properties sold has been caused by increasing prices, which has forced investors to increasingly look at the outer boroughs, and the broader New York metro area, as opposed to assets in core Manhattan. We have, however, seen an increase in supply, which should lead to increased sales volume in the fourth quarter.

Pricing in Manhattan, through the first three quarters of 2014, has hit an all-time record with an average price in excess of $1,300 per square foot. In fact, the average price per square foot realized in the third quarter was over $1,600 per square foot—the highest we have ever seen. The Manhattan submarket is in the midst of what economists refer to as a “positive feedback loop” where increasing values compel sellers to put properties on the market, which are then easily absorbed by the excessive demand. This demand competes aggressively for these assets, exerting even more upward pressure on values, causing the next wave of sellers to come to the market.

In Manhattan, the land market continues to be on fire with land values continuing to escalate to unprecedented levels. Retail properties, we believe, remain undervalued and even with an average of an amazing $3,182 per square foot, offer significant upside potential based upon the increasing level of rents. The office sector remains incredibly strong and has been getting stronger by the month as positive absorption and tremendous rental growth continue to become enhanced. Multifamily properties remain strong but potential legislative headwinds are causing concerns.

Next week, I’ll discuss the outer boroughs.

Bob Knakal is the chairman of Massey Knakal Realty Services and has brokered the sale of nearly 1,600 properties having a market value of approximately $11.5 billion.